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While Xero Limited (ASX:XRO) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 24% in the last quarter. But that doesn't change the fact that the returns over the last five years have been very strong. It's fair to say most would be happy with 295% the gain in that time. To some, the recent pullback wouldn't be surprising after such a fast rise. Of course, that doesn't necessarily mean it's cheap now. While the long term returns are impressive, we do have some sympathy for those who bought more recently, given the 35% drop, in the last year.
Since the long term performance has been good but there's been a recent pullback of 4.6%, let's check if the fundamentals match the share price.
Check out our latest analysis for Xero
Given that Xero didn't make a profit in the last twelve months, we'll focus on revenue growth to form a quick view of its business development. When a company doesn't make profits, we'd generally expect to see good revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one does expect good top-line growth.
In the last 5 years Xero saw its revenue grow at 25% per year. That's well above most pre-profit companies. So it's not entirely surprising that the share price reflected this performance by increasing at a rate of 32% per year, in that time. So it seems likely that buyers have paid attention to the strong revenue growth. To our minds that makes Xero worth investigating - it may have its best days ahead.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. If you are thinking of buying or selling Xero stock, you should check out this free report showing analyst profit forecasts.
A Different Perspective
Investors in Xero had a tough year, with a total loss of 35%, against a market gain of about 4.5%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn't be so upset, since they would have made 32%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Xero better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Xero you should know about.